Entrepreneurship

Professor C. Bhaktavatsala Rao

Department of Management Studies
Indian Institute of Technology, Madras
Lecture 21
Technological Innovation and Entrepreneurship
Part 1

Hi friends. Welcome to this module on Technological Innovation and Entrepreneurship. In

the previous sessions, we covered number of topics including, what does entrepreneurship
mean? how does one undertake the entrepreneurial journey? how does one discover whether
one is entrepreneurially inclined or not? what are the various key steps in entrepreneurship?
which we listed as ideation, prototyping testing, validation, commercialization and so on.

We also discussed how several Indian and global entrepreneurial companies went through
these steps and carved out niche for themselves in the entrepreneur space. So, in this
discussion, we also looked at various pros and cons of different methodologies, different
strategies adopted by entrepreneurial firms, entrepreneurs themselves and also what could be
the success factors.

In this session and also in the next session, we will focus exclusively on technology. We
know that technology is the key aspect of modern living, the several products we see, the
several services we have are all primed by technology, but looking at it from a different
perspective, technology has always been there. Like when somebody innovated on printing
machine or when the automobile came.

When the machine tool produces certain parts, obviously technology was there and when
factories were built using some of these machine tools and testing equipment technology was
there. So, what is new about technology now? Why technology is such a strong buzz word
today? Almost, assuming the universal predominant omnipresent kind of factor driving all
kinds of industrial growth.

Why does it happen that way? Why does it get interpreted that way? The reason is when
technology was there in the earlier years, that is in the previous industrial revolutions
technology was in a machine and the machine operated on certain technology, but actually it
was operated by man-machine interface, the machine tool ran on power which itself was
technologically generated through power generating systems.
And then transmitted through distribution systems, but the machine itself was operated by the
person, the output of the machine which could be a camshaft or a crankshaft was measured
with an instrument, but the judgment on whether the dimensions were correct or whether the
tolerances were appropriate was being made by the human being. But today, we have a
situation where several of these processes are technology driven.

It does not mean automation; it only means that wherever there was need for hazardous
activity or judgmental activity automation has taken place and machine has extended its
purview of operations and then technology therefore has become little more universal than it
was before. Secondly, all the business processes were manual even after the advent of
computerization, man-machine interface in business process was pretty high.

But today, we have a situation where many of the business processes are rendered machine
led, which means that technology has replaced the way we conduct business processes. So,
we say that technology is today more omnipresent that it was ever before. And when
technology is more omnipresent than ever before to that extent it gives several opportunities
for new companies to emerge, new ways of doing businesses to emerge and new products and
services to emerge.

(Refer Slide Time: 04:25)

So, in this module, we will discuss the role of technological innovation and entrepreneurship,
but before we go there, we will look at the entrepreneurial black box. The activities which an
entrepreneur does or what the entrepreneurial organization does could be seen as a black box.
On one side, we have a product on the other side we have a customer. The product is made by
the entrepreneur in a particular way and then delivered to the customer.

But underlying the product is technology and overwhelming the customer is the valuation of
the company. So, we have on the left side the product and the underlying technology on the
right side, we have got customer or the market place and the overarching market valuation for
the company. So, what goes on within this box of conversion is called entrepreneurship.
Entrepreneurship is indeed a black box, which is very specific to each entrepreneur, specific
to each context.

But the goal of every entrepreneur is not only to solve a problem, not only to produce a
product in an innovative way, but also achieve a claim and also achieve market valuation. We
have discussed in the previous sessions the concept of unicorn. Unicorn is an entrepreneurial
firm or a start-up which has achieved market valuation of US dollar 1 billion or above. It is a
kind of benchmark that has come to stay.

So, when we look at global unicorns, we can look at a few of these companies by their logos
and emblems. As I said, when we present the logos, we do recognize that these logos are
being used for pictorial representation of the companies and for visual impact and obviously
the ownership and the copyrights of the logos stay with the respective companies.

Ant Financial is a global unicorn which is into Fintech. ByteDance is another company, DiDi
is Uber kind of company in China, Airbnb is a hospitality company, Stripe is a payments
company, Spacex is Elon Musk’s space exploration company, LU.com is an internet
commerce company.

So whichever field you look at, you have a global unicorn not that all unicorns are beyond
controversy, we have JUUL which has achieved unicorn status through the E-Cigarette
product innovation. But opinion is divided whether that has been a good thing or not so good
thing.
(Refer Slide Time: 07:02)

So, when we look at global unicorns’ country wise, we have looked at based on CB insights
data, we will see several developed and emerging economies and you will find that US
naturally leads the global unicorn list with valuation of 678 billion dollars and China
aggregates to 374.61 billion dollars.

While India has been the third largest global unicorn club it is also evident that the distance
between the first and second and the third, which is India is significantly high. So, there is lot
to be bridged. But we also have several developed countries such as South Korea, Germany,
Singapore, Switzerland, Sweden, France, Australia, Japan in the mid-range that is
significantly below India and some of them are almost near 2-billion-dollar nominal valuation
amount. This is one aspect of the global unicorn.

In terms of the percentage, 54 percent of the global unicorn club is held by the United States
based start-ups. 30 percent by the China based start-ups and 4 percent by India based start-
ups. Companies in South Korea, Indonesia and Germany contribute 2 percent each and
companies in Singapore, Brazil, Switzerland, Israel and Sweden contribute 1 percentage.

While several other companies in other countries do contribute to the global unicorn club, the
share is so marginal that they do not get shown in the ranking.
(Refer Slide Time: 08:43)

But more importantly, let us look at, what is the kind of domain distribution in various global
rankings? In the United States, Fintech, E-commerce, internet software and services they lead
the pack. In China however artificial intelligences leads the pack, it is very interesting and
India is more mimicking the Western model with Fintech, supply chain, E-commerce, auto
and transportation leading the unicorn club.

Now that is a fundamental shift therefore, how China is trying to develop itself in the new
industrial path, while China may have lacked in the data processing and also in the
computerization and software domains in the past. Now, I think China is making a very
determined effort to get into the artificial intelligence, machine learning, deep learning space
and also achieved global leadership.

And essentially, that is being done through a variety of start-up initiatives. That said India is
also starting to realize the importance of artificial intelligence and I do hope that given the
distance between the first and second and the third and also given the fact that India is
considered to be one of the largest start-up ecosystems in the world numbering 7000 to 10000
start-ups depending upon how you look at the count.

I think there is significant potential for Indian start-ups to help India achieve leadership in
artificial intelligence.
(Refer Slide Time: 10:19)

Similarly, when you look at other countries you will find that even countries which are as
developed as South Korea and Japan are not in the global unicorn club to the extent India has
been. That does not mean that technology and innovation are not existing in those countries
and that India is superior to those countries in those aspects. Quite probably, flipping this
number into another type of qualitative analysis.

I would think that the companies in those countries are themselves undertaking significant
technological innovation in their large corporate labs or industrial labs, so much so the need
for start-ups to be independent and grow those technologies is probably less or many of these
start-ups which are there and which are promising in terms of the new technologies are being
observed by the bigger companies in those industrially developed areas before they achieve
unicorn status. So, the numbers, the valuations, the spread are very indicative, but not
necessarily fully conclusive.

The fact that even developed industrial countries such as South Korea, Germany, Singapore,
Japan and Sweden trial behind India in global unicorn club does not mean that modern
technologies or futuristic technologies not being pursued by start-ups in those countries.

Rather it could mean that the big companies, big industrial labs, big corporate labs in those
countries are in the forefront of developing those kinds of technologies that is one possibility.
The other possibility is that start-ups are indeed functioning in those area and developing
those futuristic technologies, but before this start-up’s attain the unicorn status they are being
obsorbed by the bigger industrial companies in those countries.
(Refer Slide Time: 12:16)

So, we move on to our familiar product staircase. We said that there are 5 important steps in
the start-up journey. The first is ideation, the second is prototyping, the third is testing,
validation and commercialization. As I said in the previous sessions, we keep coming back to
this very important product staircase, but the important aspect when we look at technology is,
where and how does disruptions happen? that is one question.

Does the disruption happens in terms of the ideation, in terms of the prototyping, testing,
validation or in terms of commercialization or is just a linear flow, that is another question.
(Refer Slide Time: 12:56)

The second question is, who is to best placed to disrupt and transform markets and industries,
is it innovator, differentiator, or is the follower? And to make ourselves very clear on the
terminology, Innovator is a company or an entrepreneur who innovates on a technology,
innovates on a product probably for the first time and creates a market around that product.
He discovers a new solution for a latent problem and offers it to the market.

Differentiator is also a type of innovator, but he follows the overall approach, but
differentiates himself or herself with a product that is distinct and probably he is also superior
to the innovator’s products. Follower is someone who mimics the innovator product or the
differentiator product, but comes up with a new way of presenting the product to the
customer.

Comes up with a cost-effective way of manufacturing and delivering the product or service to
the customer. We have also gone through in the previous session, that both innovators and
differentiators as 2 classes and followers has one large class are extremely important for the
society to benefit from the innovation in a larger framework.
(Refer Slide Time: 14:16)

Now, when we talk about technology let us look at how technology moves. Technology has
been moving rather slowly in the first and second even in the third industrial evolution, but in
the fourth industrial evolution, which is where we are present today technology has been
growing pretty rapidly.

Now let us take the example of home light bulb based on the information provided by
American energy star organization. As we know the light bulb has been invented by Edison.
Over a century between 1879 to 1985, the light bulb remained largely what Edison
discovered as a light bulb. However, over the last 25 years there have been more
breakthrough technologies in light bulb than there have been ever.

Compact fluorescent lamp and LED (light emitting diode) bulb technologies are two of the
most important examples. So there has been massive improvement in energy efficiency from
the first design accompanied by progressive drop in pricing, significant increase in lifespan
and increase in customization options.

So if the energy cost was 7.23 dollars with a typical life of one year in the standard
incandescent bulb, it came down to 5.18 dollars per year and 1 to 3 years of life in halogen
incandescent, came down further to 1.57 dollars per year in the compact fluorescent lamp
with an increased lifespan of 6 to 10 years.

And now in the LED stage it is just 1 dollar that means the drop has been as high as 1\7th of
the original incandescent lamp and the wattage which has been used by the lamp has come
from 60 watts to 9 watts and lifespan has increased by 15 to 20 times. Not only that, the types
of bulbs which are used have varied substantially, by retaining the same kind of holding
system the options available for different kinds of bulbs to meet different room conditions,
different lighting requirements and different ambient conditions has substantially gone up.

(Refer Slide Time: 16:32)

So there is greater energy efficiency, and it has been estimated that if every American home
replace their 5 most frequently used light fixtures or the bulbs in them with LED bulbs that
have earned the energy star rating then America would save enough energy to light 33
million homes for a year, save nearly 5 billion dollars each year in energy cost, prevent
greenhouse gas equivalent to the emissions from nearly 6 million cars.

So, all this points out to the fact that positive technology not only improves the features, the
lifestyle for the customers but also protects the environment and improves the quality of life.
So, technology is an extremely important driver of how we progress. We progress not only
through growth and use of more products; We also progress by preserving our environments
in a very sensitive way, so that is where technology plays a new role.

And as we go through this important aspect of technology, we will not focus only on start-ups
and technology, we will also focus on technology as a broader concept and how technology
could permeate different walks of life from basic needs to the sophisticated needs and how
there could be opportunities in all such technological value chains for start-ups to come and
deliver some specific value.
(Refer Slide Time: 17:57)

So now let us look at technological innovation. I would say that there are 2 types of
innovation: one is a sustainable innovation, second is a disruptive innovation. What is the
difference between a sustainable innovation and disruptive innovation? We all know that
generally there is a product market situation or scenario, certain products fit certain markets
and certain markets require certain products.

This is the product market configuration that happens, like automobiles requiring automobile
users, coal requiring thermal power plants. So, there is a product, there is a market. Now
sustainable innovation is that kind of innovation which does not disrupt this market situation
that is the customers remains as they are, the products by enlarge remains they are, but the
product themselves have been substantially improved to lead to a different kind of state of the
art for the market as well as for the product.

The example, which we went through previously that is the light bulb, the movement from
CFL to LED is a sustainable innovation, the product market configuration remained the same,
but the way the industry developed itself and the way the consumer started using the bulbs
has substantially changed and why this is an innovation because if somebody does not follow
this technological path and chooses to be in the previous generation of products that company
would go away.

The industry would not go away, but the company would go away. Therefore, it is important
for all companies to pursue innovation. So, within sustainable innovation, we have 2 types of
innovation, one is the evolutionary innovation where the changes are incremental, and the
second is revolutionary innovation. If the CFL bulb is improved to better coating through
better strength of the light holding area, it is an evolutionary innovation. When LED has
replaced the CFL it’s a revolutionary innovation but again comeback to the point neither the
evolutionary innovation nor the revolutionary innovation does not alter the fundamentals of
product market configuration.

We have the second type of innovation which is disruptive innovation, which is a

transformation innovation, which it completely changes, how the industry does its activities.

So, when we talk about let us say electric vehicle completely replacing the IC engine vehicle
then it is a disruptive innovation. Why is it a disruptive innovation? Because the way
automobile will look, the way automobile will run will change, not only that the entire
component industry will change, the fuel supply industry will change, the battery charging
industry will come in, the profile of automobile itself will change. Therefore, the industry
itself will go through a significant transformation, therefore it is a disruptive innovation.

Now where do the sources of innovation lie? The sources of innovation lie in 3 places. One,
the universities, universities typically provide the inputs for all the 3 types of innovation
although advanced countries have advanced research labs, which provide more disruptive
innovative inputs for start-ups or established forms.

When universities provide inputs for innovation typically start-ups take on those innovations
and build their start-ups around those innovations, which is one of the reasons why
increasingly students when they are undergoing their advanced engineering courses or
advanced science courses or taking up some of their innovative activities in the universities or
colleges as their own start-ups along with the professors. That is a trend, which has worked
very well in the United States and likely to work very well in the Indian situation also.

Over and above that universities themselves mostly the advanced universities have their own
intellectual property generation and protection systems and they have the ability to generate
technologies, preserve them and license them to start-ups as well as to other companies.

Now when universities provide the the fundamental technological inputs and when start-ups
focus on disruptive aspects of innovation and develop them to commercialization stage. We
have established firms, which take on those start-ups and then work with them and then
absorb the start-ups or the technologies developed by them for commercialization status.
In relation to that, established firms could take up directly from the university’s incremental
innovation, the sustainable innovation and then they also could develop their innovative
developments in the sustainable space. But if you look at the overall macro picture, there is a
symbiotic relationship between these 3 types of innovation: the sustainable evolutionary
innovation, the sustainable revolutionary innovation and the disruptive transformational
innovations. There is also the symbiotic relationship between the 3 organizational systems
which work on these innovative aspects.

(Refer Slide Time: 23:21)

Now alluding to this further, we have to focus on where does technological innovation occur?
There are this traditional main spaces, traditional main spaces are the companies the labs like
CSIR labs, the university labs and then publically funded, privately funded research labs, but
then we are having these new main spaces which is the start-up space which is our focus as
we go through this course.

And again, there is a symbiotic relationship between all these 3 spaces, the traditional main
spaces as well as the new main spaces, and universities provide the core technologies, start-
up develop the core technologies to a commercialization stage and established firms acquire
the start-ups or their core technologies.

Now it is very important therefore for start-ups to know, how they are going to acquire the
technologies? How they are going to develop the technologies? And, what kind of symbiotic
relationships they should have with the universities on one hand and with the established
companies on the other?
(Refer Slide Time: 24:22)

Now the unique role of start-ups can be described in 2 ways. One initial rejection and second
eventual dominance. When the power of technology is so high that the market or the user at
first does not understand the full impact, the full power of technology and therefore there is a
kind of if not rejection, there is at least skepticism. Whether this is the kind of technology that
is going to deliver the goods or services for them.

But, when the power of technology is understood, the technology is accepted so widely then
there is a dominance. So, this graph plotted with x-axis being time and y-axis being
performance, how the mainstream technology and how the emerging technology work
together. The graph which is on the right, on the top which is the graph which is moving up
that is the mainstream technology performance which has got its own set of linear
performance activity.

As time progresses, its performance gets incremented, but then there is this potentially
disruptive technology which comes in at a point which apparently is a bit below the
established mainstream technology, but very soon the path is so fast and rapid that it crosses
the technological efficiency provided by the mainstream technology and once this happens
the emerging disruptive technology occupies the entire space.

And, it is not easy to accommodate the mainstream technology and also at the same time
encourage a disruptive technology. Clayton Christensen who has done extensive research and
hypothesization in the disruptive technology area has opined that every company that has
tried to manage mainstream and disruptive businesses within a single organization failed.
Why? That is because of the culture, the ecosystem and the passion that are required to
support a disruptive technology are significantly different from those required for a
mainstream technology. In the case of mainstream technology, things almost happen
automatically although there are requirements of budgets, there are requirements of planning,
there are requirements of diligence commitment.

The kind of passion and the hard work, the smart work which is required for disruptive
technologies probably gets replaced by a sense of incremental automatic development that
happens with the mainstream technologies. So, that is a principle reason why it is so. So, if
you look at for example the fixed landlines and the cellular telephones you will find that
when the cellular telephones first came in, they were very bulky probably they were as large
as let us say 6 inches by 12 inches kind of boxy appearance.

Therefore, you can say that although it was a potentially disruptive technology, it looked
almost in terms of the volumetric size as big as the landline. Therefore, it did not immediately
disrupt, but the moment the form factor improved, the moment the functionality is improved
and when the phone could be operated within the hand obviously it overtook the landline
usage.

It overtook the fascination for landlines and changed into infatuation for the new cellular
telephone systems. Therefore, that is how this works.
(Refer Slide Time: 28:07)

And taking on for further hypothesization of Clayton Christensen, there are 4 features of
disruptive innovation. One disruption is a process it is not a onetime occurrence, it is a
process that occurs every now and then and also in a very systematic fashion. Second, the
business models of disruptive companies are significantly different from business models of
sustainable innovation.

Then disruption typically comes with risk of failure, because we are working on something
which has not been tried out any time ever. But eventually all disruptions need to be
embraced by big companies. Typically, as per the hypothesis, disruptive innovations originate
in low end or new market foothold.

That is if you say that the market has a normal distribution curve and if the high end is this
portion and if the low end is this portion disruptions occur here or here. Christensen says that
disruption typically start in the low-end market and then move up the value chain and occupy
the entire market space.

But it is also possible for disruptions to occur in the high-end market and then takeover. For
example, you look at the flat panel TVs or you look at the OLED based smart phone, smart
devices they typically occurred in the high end and then they moved on to capture the overall
market. Therefore, if the disruptive innovation has been mastered at the very first go it is
quite possible that they will be there throughout the market space completely.
It is not necessary that they should start at the low end or at the high end. So, when a start-up
looks at the disruptive innovation it is trying to develop, it is very important to see what kind
of market I am addressing, am I addressing the top end market, the middle market or the low
end but broader market.